Citi weighs in this week on the recent collapse in mortgage real-estate investment trust prices, as a sharp sell-off Friday followed months of broad-based weakness:

In general, we continue to like the credit sensitive stocks and believe they are oversold, while maintaining our cautious stance on agency MBS focused REITs (no Buy ratings) given rate uncertainty…. While we recognize yield stocks are less compelling when long-term rates rise (and credit spreads have widen), getting 400-500 bps over Treasuries even if the 10-year goes to 3% is historically attractive. A stronger US economy is positive for their fundamentals and ROE’s will increase when the Fed ultimately raises short-term rates.

Looking at some specific mortgage REITs, Citi says it’s cutting target price for American Capital Agency Corp. (AGNC) down to $20 from $30 (it’s trading at $21.19 early Tuesday) and its target for Annaly Capital Management Inc. (NLY) to $12 from $15 (it’s currently at $11.86). Citi also reitierates a buy rating on PennyMac Mortgage Investment Trust (PMT). Citi adds that it believes the market has been too harsh on the commercial mortgage REITs and would buy Starwood Property Trust Inc. (STWD) and Blackstone Mortgage Trust Inc. (BXMT) at current price levels.

Citi says agency REITs could face more downside, as large agency MBS REIT stocks are down 25-35% over the past few months and trading at 0.8x P/B, after book values have declined due to MBS basis widening and higher long-term rates. Citi says liquidity in the agency MBS market remains thin with wider bid/ask spreads. More from Ciit:

We remain cautious on the agency stocks given our concern about higher rates going forward, though traders suggest much of the tapering risk is priced into the bond markets. And even if agency MBS REITs stabilize post-tapering, fears around the Fed hiking short-term rates could be lurking around the corner keeping sentiment negative. The bull case is that the economy is not strong enough for the Fed to taper yet, plus new investment spreads are wider and the stocks are below book value. Going into Q2’13 earnings, we expect reported book values to be down 10-15% for the agency REITs and believe mgt teams have been selling assets and increasing hedging activity which negatively impacts future earnings. There are several hybrids that own some non-agency MBS, but we believe their larger agency exposure will trump the lighter negative impact from non-agency.

Also this week, as analysts continue to try to make sense of what’s been happening to mortgage REITs, Wunderlich Securitiesdowngraded the entire sector while FBR Capital Markets called last week’s sell-off “an overreaction” that leaves prices looking attractive now.